Inflation is also one factor experts have said contributed to the volatility on the Dow Jones Industrial Index
DJIA, -0.31%
and S&P 500
SPX, -0.18%
in recent weeks. Investors are afraid inflation will cause the Federal Reserve to raise U.S. interest rates and shift money into bonds. Small fluctuations in prices don’t always seem “consistent with their experience,” said Mark Hamrick, a senior economic analyst at the personal-finance company Bankrate.

But people should pay attention to the CPI. Inflation refers to the price increases for a basket of products and services — including food, gas, energy, utilities, clothes, automobiles, plus transportation and medical services — and is a widely regarded economic indicator, influencing people’s confidence in the economy and their willingness to spend.

Inflation can work against your savings, said Chris Costello, a certified financial planner who co-founded the 401(k) rebalancing company blooom. Most standard bank accounts don’t have high interest rates, and they won’t keep up with inflation, he said. “You’re effectively losing money.” Diversify your investments, especially for longer-term savings like retirement accounts, he said.

Is everyone’s spending included in the CPI?

Approximately 25% of the items in the Personal Consumption Expenditures Price Index — another key index of inflation — are excluded from the CPI basket, according to the Federal Reserve Bank of St. Louis. Only “out of pocket” expenses are included in the CPI. Items that are excluded from the CPI include free checking, employer-funded medical care and medical services paid through Medicare and Medicaid.

What’s more, the CPI is an index of inflation for urban dwellers. It excludes spending by “rural dwellers,” those in farm households, people in the U.S. armed forces, and those in institutions, such as prisons and mental hospitals. The CPI has two requirements: More than one-half of the household’s income must come from clerical or wage occupations, and at least one of the household’s earners must have been employed for at least 37 weeks during the previous 12 months.

What was going on with prices in January?

The cost of imported goods has also been rising, largely because of a spike in oil prices, which rose 4.7% in January. The rising cost of those imports has contributed to an uptick in U.S. inflation. But as MarketWatch reported last week, price pressures are still quite tame by historic standards. In fact, inflation has hovered at or below 2% on the year for years.

When wages don’t increase as fast as prices, employees are worse off during times of inflation. The same is true for retired people on fixed incomes. Put simply, they can buy less, while making the same amount of money. For example, when adjusted for inflation, U.S. wages actually declined by 0.2% in January.

Is it ever a good thing when prices go up?

A small, stable and predictable amount of inflation can actually be good for the economy, according to the International Monetary Fund. When inflation is predictable, businesses and employers can adjust accordingly. Plus, if consumers anticipate prices will rise in the future, they may make purchases sooner, giving the economy a boost.

If inflation lasts for long enough, businesses may actually raise their prices to keep up. That said, for some businesses a fluctuation in inflation doesn’t justify raising prices, such as for restaurants, which may have to spend money printing new menus in order to change prices.

Inflation can be influenced by large changes in the market for particular goods and services, according to the St. Louis Fed. Because extreme bumps in inflation tend to be “short-lived and self-correcting,” the Fed often ignores them. However, it must decide when inflation is due to excessive monetary growth — that is, requiring a policy response — and when it is due to transitory market fluctuations.”

When the Fed increases interest rates, there may be a weaker demand for goods and services as borrowing money to pay for those goods becomes more expensive. There may be less demand for workers and materials that are necessary for production, so wages may also weaken. That’s why the Fed generally hikes rates during a strong economy. And while the Fed may have a response to inflation, the Fed’s actions can also influence expectations and, therefore, directly influence inflation.

So what should you do if inflation is rising?

Track your expenses on a budgeting app like Mint or Clarity Money, Hamrick said. Monitoring your own behavior can probably reveal more than inflation numbers do because every household spends differently. And several big-ticket expenses have outpaced inflation and would likely impact budgets more, including the costs of health care and education.

“Offset the unwanted impact of unwelcome inflation by changing your spending habits proactively and make changes monthly as necessary to keep a strong hand on potential runaway costs,” said Lynn Ballou, a certified financial planner and regional director for EP Wealth Advisors, based in the San Francisco Bay area.

Mortgage Rates

Powered by

This advertisement is provided by Bankrate, which compiles rate data from more than 4,800 financial institutions. Bankrate is paid by financial institutions whenever users click on display advertisements or on rate table listings enhanced with features like logos, navigation links, and toll free numbers. Dow Jones receives a share of these revenues when users click on a paid placement.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.